Exploring Different Staking Options in Cryptocurrency
This guide will explore the ins and outs of crypto staking and discuss various options you can consider for staking.
Staking cryptocurrency is an effective way to contribute to the security and integrity of blockchain networks while earning crypto rewards. By holding onto your digital assets and staking them, you help validate transactions and maintain the network's stability. In return, you receive staking rewards paid out in cryptocurrency.
This guide will explore the ins and outs of crypto staking and discuss various options you can consider for staking. One of those options for staking is by using Trust Wallet. You can directly stake a number of assets easily and start earning crypto today.
What Is Staking Crypto?
Before we explore different staking options in cryptocurrency, let’s begin by defining what staking crypto is.
Staking cryptocurrency is a process through which crypto holders “lock up” their crypto assets to help secure a blockchain network by participating in validating transactions and, in exchange, earning staking rewards paid in the network’s native tokens.
Staking only takes place in blockchains that use the proof-of-stake (PoS) or a related consensus mechanism, such as delegated Proof of Stake (dPOS).
Staking cryptocurrency is a valuable way to earn rewards while reinforcing the decentralization and security of a blockchain network. It’s akin to depositing your cash in a bank with a high-yield savings account. The bank will lend out your cash deposit, and in return, you’ll earn interest on your funds.
If you’re looking to get started with staking, one of the easiest ways is by using Trust Wallet.
When it comes to staking, there are three major staking options available to crypto holders:
Let’s take a look at what each staking option involves and how you can choose the right staking option for yourself.
For the purposes of this guide, we’ll use the Ethereum blockchain as an example to explain the different staking options. However, it’s important to note that besides the Ethereum blockchain, you can also stake on other blockchains such as Cardano, Cosmos, Solana, and Tezos.
Native staking refers to individuals participating in a blockchain network as validators. For example, you could do so by staking a minimum amount of 32 ETH for a certain period of time, known as a bonding period, on the Ethereum network.
Validators play a crucial role in securing a blockchain network, maintaining consensus, and proposing as well as validating blocks. In exchange, Ethereum validators earn rewards paid out as ETH that are produced by the protocol itself. However, validators cannot withdraw their earned rewards until the bonding period is over.
When it comes to native staking, you have two options: operate and manage the validators on your own (Do-it-Yourself (DIY) staking) or use a third-party service to manage the operations of your node - a service referred to as validator-as-a-service (VaaS) staking.
DIY native staking involves operating your own validator node to secure a blockchain network. This means that all the management and maintenance is solely on you as you individually own the validator. In addition, if you opt for solo staking, you’ll be required to stake a minimum of 32 ETH, which doesn’t get mixed with that of other users.
And because you solely own the validator, all the rewards you earn are entirely yours and aren’t shared with any other users. However, in certain instances, you don’t instantly earn rewards after your original staking transaction due to the protocol’s activation process.
Depending on the protocol, you may have to wait anywhere between a few days to a few weeks (or even months, in worse cases) before your validator becomes active.
If solo native staking doesn’t appeal to you, you can consider VaaS providers. VaaS providers typically manage the validators on your behalf and eliminate the hassle of handling a validator. A good VaaS provider will manage all the technical aspects of your validator nodes and ensure smooth operations. In exchange for providing their services, they usually charge a commission on the rewards you earn.
Pooled Staking: Collaboration for Broader Participation
Another staking option besides native staking is pooled staking.
Pooled staking, also referred to as staking pools, provides crypto holders with a chance to stake whatever amount of ETH they wish to stake in order to meet the minimum of 32 ETH. Just as the name suggests, an individual’s stake is pooled together or combined with that of other individuals to achieve the required minimum deposit of 32 ETH.
Staking pools in the Ethereum ecosystem offer you an opportunity for broader participation by making staking a lot more accessible. Despite the accessibility it offers, pooled staking is riskier than native staking due to the added counterparty risk.
Staking pools are typically managed by pool operators who require multiple stakers with less than 32 ETH to come together and pool their funds to meet the minimum deposit required. And so, instead of owning your own validator like you would with native staking, your individual stake is merged with that of other people to achieve the 32 ETH.
Depending on the pool you join, the pool operator is in charge of handling the validator system supporting the respective pool. They can also activate and deactivate validators based on the withdrawal and deposit activities. This synergetic approach enables individuals to enjoy all the benefits of staking to earn rewards without having to own and operate individual validators.
In addition, individuals end up owning a percentage of the staked pool depending on their own contributions. This percentage ownership is also used to determine the rewards each individual in a staking pool will earn. Thus, the more you stake in a pooled staking, the more rewards you can potentially earn.
With pooled staking, the network validators work together to generate rewards by validating new blocks and maintaining consensus. Moreover, unlike native staking, pooled staking offers validators immediate rewards minus a bonding period.
Liquid Staking: A Flexible Approach
A third staking option that you can consider is liquid staking. Liquid staking offers a more flexible variation of pooled staking.
Similar to pooled staking, liquid staking allows you to stake whatever amount of ETH into a given pool. The pool is managed by a pool operator who handles all the technical aspects of the pool system. Each pool earns a reward as long as its validators secure the respective blockchain network, propose/validate new blocks, and maintain consensus.
The rewards are then combined and paid out to the crypto holder based on each individual's percentage ownership. However, where liquid staking differs from pooled staking is that in the former, individual holders get a transferable receipt token in exchange for staked tokens.
The transferrable receipt token acts as your stake in the liquidity pool, serves as proof of ownership, and permits withdrawal rights. In addition, the token can be transferred to alternative wallets and can be undertaken by other services as collateral for supplemental reward-creating activities while still earning you staking rewards.
Liquid staking provides people with additional staking options that aren’t obtainable with pooled or native staking. For instance, while your staked ETH stays locked and isn’t immediately available for trading or use, your transferrable receipts tokens give you more flexibility as they are liquid and easily accessible.
You can opt to transfer them to an alternative wallet in case of a security issue with your principal wallet. This way, you’re able to move your funds to a wallet that’s more secure or then distribute the risk across multiple wallets. Additionally, you could make additional income in tandem with staked pool rewards by leveraging collateralization and decentralized finance (DeFi).
Still, out of the three staking options, liquid staking is often considered the riskiest staking option in comparison to native or pooled staking. This is because it introduces additional risk, given that the receipt tokens can be transferred.
Moreover, you can also lose your staked ETH in the event you lose your transferrable receipt token. This can be a result of liquidation issues faced in a DeFi lending protocol or making poor trading decisions.
Your receipt token can also veer from the underlying asset’s value due to liquidity challenges, regulatory changes, and volatile market conditions.
Choosing the Right Approach for You
Staking is a popular way for you to earn crypto. You can easily begin staking using a crypto wallet like Trust Wallet.
However, despite the benefits, staking is also risky, and thus, choosing the right approach for yourself is quite vital.
So, what should you consider when selecting a staking option?
For starters, you need to consider your risk tolerance. Cryptocurrencies are generally volatile, and their price swings can be quite severe. When you are staking, you often can’t immediately withdraw your tokens to sell them in case they drop (or rally) a significant amount. So market risk is a factor to keep in mind, which ties in with how risk-averse you are. If you are comfortable holding a volatile asset for the long-term, staking could be beneficial. However, if you may need to access funds held in a token, you may want to consider not staking it (if it has a longer withdrawal period).
Secondly, you need to consider your technical expertise. If you aren’t well-versed in the technical aspects of running a node, you are better off settling for pooled staking or liquid staking instead of DIY native staking. This way, you don’t have to deal with the hassle of operating and managing a validator node.
Thirdly, just like with any investing plan, you must have an end goal in mind. As you consider the three staking options, you need to ask yourself what you want to achieve and which of the staking options will help you achieve your crypto-staking goal. Don’t go into crypto staking blindly, as you could lose your entire investment.
Last but not least, you should ensure that you understand the bonding and unbonding periods of each staking option. Native staking, for instance, has a bonding and unbonding period that is protocol-controlled. Thus, it might take time to unlock your crypto and withdraw it. Pooled staking, on the other hand, doesn’t allow you to trade your staked coins.
There’s also the risk of losing your staked coins in case you lose access to the crypto wallet you used to carry out your staking activities, especially if you opt for naive or pooled staking. As such, it’s imperative that you consider the risks associated with each staking option vis a vis their potential impact.
Whether you are a novice or an experienced crypto user, it’s crucial to do your own research (DYOR) to get a better understanding of the risks and benefits of each staking option.
For instance, while liquid staking provides a more flexible approach to staking, it’s also arguably the riskiest as it further adds to the counterparty risk. Still, it offers crypto holders better liquidity and accessibility as they can easily transfer the receipt token to other wallets to spread their risks, something that you can’t do with native or pooled staking.
While pooled staking is excellent for making staking accessible, it also strikes a good balance between native and liquid staking. By opting for pooled staking, you don't have to worry about having the technical know-how required to run and manage validator nodes. This, of course, is not to say that it doesn’t have its own risks.
Native staking, though the least risky, requires you to have the technical know-how required to manage and operate nodes. And while your rewards are yours solely and aren’t shared, getting started on native staking can be a tad bit difficult, especially if you opt for DIY native staking.
At the end of the day, the staking option you choose will depend on your technical capabilities, risk tolerance, and the desired individual level of flexibility and control. While there are different staking options you can choose from, it’s important to weigh the pros and cons of each of the three staking options discussed in our guide.
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Note: Any cited numbers, figures, or illustrations are reported at the time of writing, and are subject to change.